What is Direct Selling?

MLM companies like to refer to themselves as “direct sellers.” The MLM industry lobbying and trade organization calls itself the “Direct Selling Association.” The Federal Trade Commission characterizes MLM as “one form of direct selling.” In fact, direct selling and MLM are two very different things.

Direct selling is person-to-person selling away from a fixed retail location.[1]  The salesman is generally considered to be a self-employed, independent contractor, who is compensated based on the volume of sales to consumers.   As described by Arthur Leff in Swindling and Selling, it is a difficult business:

… door-to-door is a tough selling scene.  Since you are not, like a storekeeper, necessarily dealing with people who, by showing up at your shop, indicate that they are interested in buying, you hit an enormous number of totally “dead” prospects.   And since you are going to them, you expend a huge amount of time and labor (i.e., money) reaching the very few “live” ones you do find.  Thus you must make a very large profit per sale to make any money at all; but the higher you set your price, the stronger the customer resistance.[2] 

Leff also explained one key aspect of a direct selling system, which is the fundamental conflict between the manufacturer and the salesmen concerning how many salesmen there should be:

From the manufacturer’s point of view, all that counts is gross sales.  Whether he reaches a million a year with ten salesmen or a hundred concerns him little, so long as he reaches it at the same sales cost and can continue to do so.  But as to the number of salesmen used, the salesmen and the manufacturer are in conflict.  For assuming a finite market (hardly an unrealistic assumption), each salesman is a competitor of every other, and thus strongly interested in minimizing the sales force.  That is, not only will each seller fight for a larger split of whatever returns there are on his sales, but he will also fight for a restriction upon the number of people trying to get those sales.[3]

Leff oversimplifies this conflict a bit.  Most manufacturers recognize that a healthy distribution system must offer distributors a reasonable opportunity to succeed, which means that there can’t be so many distributors that they cannibalize each others’ sales.   Likewise, most distributors recognize that they benefit from the activities of other distributors, including by increasing brand recognition, by lowering prices due to the manufacturer’s increased volume, or by increasing pooled advertising contributions or similar factors.   But the basic point – that distributors want there to be limits on the total number of distributors – and would prefer exclusive sales territories – is important when contrasting direct selling with MLM.

So why do MLM companies use the term “direct selling” to describe themselves? It is because direct selling is unquestionably legitimate and legal and has been an accepted form of doing business since the dawn of civilization, while MLM is a relatively recent invention, has questionable legitimacy and suffers from a well-deserved bad reputation.

[1] https://www.ftc.gov/tips-advice/business-center/guidance/business-guidance-concerning-multi-level-marketing

[2] See Leff, Arthur, Swindling and Selling (Macmillan 1976), at 89-90.

[3] Leff, supra, at 103-104.